Is Compagnie Plastic Omnium (EPA:POM) Likely To Turn Things Around?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Compagnie Plastic Omnium (EPA:POM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Compagnie Plastic Omnium is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.024 = €81m ÷ (€6.2b - €2.8b) (Based on the trailing twelve months to December 2020).

Thus, Compagnie Plastic Omnium has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.3%.

View our latest analysis for Compagnie Plastic Omnium

In the above chart we have measured Compagnie Plastic Omnium's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Compagnie Plastic Omnium.

The Trend Of ROCE

When we looked at the ROCE trend at Compagnie Plastic Omnium, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.4% from 17% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a separate but related note, it's important to know that Compagnie Plastic Omnium has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Compagnie Plastic Omnium's ROCE

We're a bit apprehensive about Compagnie Plastic Omnium because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 32% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Compagnie Plastic Omnium (of which 1 shouldn't be ignored!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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